Regulatory: Think twice before asserting a trade secrets claim

A trade secrets claim can dramatically escalate the defendant’s litigation exposure. The Uniform Trade Secrets Act provides a generous measure of damages, and if the defendant is found liable for willful misappropriation, then the exposure increases to include both fee shifting and multiple damages. Thus, it is not surprising that many plaintiffs consider a trade secrets claim an essential part of a strong offensive litigation strategy.

However, in-house and retained counsel should also consider carefully the risks of a trade secrets claim for a plaintiff. Asserting a claim under the Uniform Trade Secrets Act can backfire on the plaintiff and tip the balance of litigation leverage against the plaintiff and in the defendant’s favor. The risk that a trade secrets defendant will use the claim to turn the tables on the plaintiff is often greatest when the plaintiff has pleaded the claim without adequate pre-suit investigation and analysis or has added the claim to the complaint as an afterthought simply to enhance the remedies that the plaintiff can include in its prayer for relief.

First, the plaintiff should consider the impact of a trade secrets claim on its own pleading and discovery burden. Conclusory allegations that provide only vague descriptions of the trade secrets may prompt defendant to file a motion to dismiss, drawing the plaintiff into motion practice that delays the case and adds expense. Once discovery commences, the defendant almost certainly will seek very broad and invasive discovery to test the plaintiff’s right to trade secret protection. The defendant will explore through document discovery and depositions how the trade secrets were developed, how the plaintiff uses the trade secrets in its business, and how plaintiff protects the trade secrets from disclosure. Because trade secrets by their nature may be deeply embedded in the company’s operations and strategic planning, it is often difficult for the plaintiff to define any clear limits to the scope of the discovery to which the defendant is entitled. This discovery may require voluminous document production and numerous depositions, and this burden will fall disproportionately on the plaintiff because the defendant has no comparable burden of pleading and proof.

Even apart from the burden, disruption and expense of this broad discovery, plaintiff’s executives quickly may become alarmed by the risk to data security posed by invasive discovery. By definition, discovery in a trade secrets case requires placing copies of highly sensitive business records in the possession of opposing counsel on IT systems whose security measures may be unknown and over which the plaintiff has almost no control. Although a protective order may restrict certain categories of documents or information from disclosure to the defendant’s executives or employees, most protective orders do not address at all the risk of inadvertent disclosure by opposing counsel or even hacking of opposing counsel’s computers by a third party. The risk of disclosure only increases if the parties proceed to a hearing or trial, where counsel may confront a trial judge who is resistant to requests to seal extensive filings or to exclude the public from the courtroom.

As the parties progress to a decision on the merits of the trade secrets claim, the plaintiff will come face to face with the risk inherent in submitting for judicial determination the company’s right to trade secret protection. A judicial determination that information is not entitled to trade secret protection can have significant impact on the company’s ability to enforce confidentiality covenants in both its commercial and employment contracts and any related employee noncompetition covenants. Where the defendant has assembled credible evidence attacking the plaintiff’s trade secrets, this risk can create significant settlement pressure.

Finally, the plaintiff should consider the risk that it too may be subject to fee shifting if its trade secret claim unravels in litigation, and the defendant develops evidence that the claim was brought in bad faith.

When a plaintiff asserts a trade secrets claim, it is escalating the risk for both sides of the suit. The plaintiff should consider carefully its own tolerance for these risks before making the decision to proceed with the claim.